Inventory classification can help a company control its inventory by reducing the amount of stock they have on hand and by increasing the inventory turnover ratio. Both of which make a company’s distribution network more efficient and lower its overall cost. Usually, inventory items are classified into three categories by following the ABC approach. The ABC approach provides a way of categorizing items that will have a big impact on overall inventory cost. It also provides a way for Supply Managers for identifying items that require different controls and oversight. These categories are:
- Class A: These are high revenue products that account for 80% of annual sales and 20% of inventory
- Class B: These are products account for 15% of annual sales
- Class C: These are products account for 5% of annual sales. These are low volume sales items
Another recommended breakdown of ABC classes: [1]
- Class A: approximately 10% of items or 66.6% of value
- Class B: approximately 20% of items or 23.3% of value
- Class C: approximately 70% of items or 10.1% of value
Classifying inventory will allow the Supply Manager to set up a review schedule to check inventory levels to establish inventory control. With Class A items they should have a high-frequency review schedule and strict controls. With Class B items they should have a periodic review schedule to establish moderate control utilizing EOQ and Reorder Point Analysis. Class C items should have moderate controls too because keeping high stock levels of these products is costly, takes up space and reduces the turnover ratio.
AcqLinks and References:
Updated: 7/18/2021
Rank: G
